You are here

New Fed plan to boost economy may not be worth it.

Submitted by Jen Jones on Sat, 11/06/2010 - 12:28am

Months after a number of debated stimulus efforts on the part of our federal government to help bolster an ever-weakening economy, Chairman of the Federal Reserve Ben Bernanke is bringing to light yet another move designed to try it again. Given the mood of the people and their recent display of frustration at the polls, it’s not very likely that Bernanke’s message will reach accepting ears.

It’s an odd time for our country. People are financially hurting. Our bankruptcy law offices have been quite busy helping many in the Triangle area file and deal with personal bankruptcies, the reasons for which are as varied as the people themselves. Unemployment. Medical. Bad mortgages. There are all kinds of new debt out there causing people a lot of stress.

So, while we understand the country’s potential reluctance of another Bernanke-led stimulus effort, the prevailing sentiment is that the government has to do something to assist consumers. The pressure is on them to come up with something different, plans that are creative and don’t involve Wall Street or convoluted high-level economic moves that take months for the financial salve to impact the peoples’ wounds.

The new plan is expected to be met with questions by even those involved with it and entails the Federal Reserve purchasing additional government bonds that will create a lowering of interest rates for mortgages and most types of loans. In turn, more people and business can begin borrowing again, which gets money moving and hopefully, companies hiring.

These multi-layer approaches just don’t seem to curry favor with the people. Plus, interest rates are already at exceptionally low levels on all fronts and yet, here we are.

It’s no surprise that home sales dropped after the expiration of home buyer tax credits last April. Those credits materialized as dollars that people could actually see. In other words, that planned worked. The majority of Americans want tangible results, not vexing strategy.

The plan also faces scrutiny because it is inherently flawed. When the government buys bonds under a plan like this, it does so in such volume that it lowers interest rates. Last year, the Fed purchased $1.7 trillion in mortgage and Treasury bonds, creating lower rates in the corporate lending and mortgage industries.

This time around, the Fed is considering purchasing only $600 billion worth. While the smaller may help the plan get through official channels of approval, it may not be enough to have any real impact. And, even if it does, it’s not the type of impact we need. Moreover, when interest rates stay abnormally low for extended periods, it can stimulate inflation, which directly affects consumer wallets.

Extremely low interest rates could also create a new wave of speculative real estate buying and create yet another bubble, poised to burst the moment rates spike again.

This government needs to find a way to directly support its citizens, not shoot for the moon and hope for the best. Instead, Washington needs to develop innovative plans that go straight to the heart of the recession, not ideas that wallow in countless government committees while more people call our offices, receive foreclosure notices and lie awake at night because of the latest layoff rumors.

Ultimately, the Fed needs to help the fertilize the economy to let it grow naturally, not inject artificial enhancements to create temporary success aimed at long-term failure. It’s a strategy that is tired and spent. Like most of America.